29 Jun, 2022
Arm IPO, T-Mobile shares top monetization options for Softbank after fund losses
After reporting historic losses for its Vision funds, SoftBank Group Corp. will need to raise capital. In the longer term, the company can wait for its upcoming Arm Ltd. initial public offering, but shorter term, SoftBank could explore unloading its T-Mobile US Inc. shares.
The Japanese conglomerate's Vision Fund 1 and 2, which are the company's venture capital funds that invest in high-growth startups across the world, posted a historic loss of $27.6 billion for its fiscal year 2021, due to a rout in tech stocks, rising interest rates and a regulatory crackdown in China.
With losses across the two investment portfolios, SoftBank Group will need to look to its other assets to continue to fund its Vision Fund 2 investments. SoftBank's T-Mobile and Arm assets present the best way to raise capital, analysts said. The T-Mobile and Arm assets are 4% and 12% of SoftBank Group's equity value holdings, respectively.
SoftBank Group declined to comment.
Arm IPO is attractive
"The Arm asset is quite attractive and the best non-strategic asset on their balance sheet that they are eager to unload," said Hatem Dhiab, managing partner at investment firm Gerber Kawasaki Wealth and Investment Management.
SoftBank is planning to list Arm and keep a majority stake in the U.K. chip designer, after plans to sell Arm to U.S. chip giant NVIDIA Corp. for $40 billion fell through earlier this year. The NVIDIA deal was subject to intense scrutiny from competition regulators in the U.S., Europe, China and the U.K.
When asked, Masayoshi Son, SoftBank’s CEO, declined to comment on the valuation he is seeking for the Arm IPO.
While an Arm IPO totaling $40 billion seems far off, selling a stake to QUALCOMM Inc. and its consortium of investors may help SoftBank "overcome the immediate crisis" of raising cash for Vision Fund 2 by "bringing confidence to other investors," said Kunal Sawhney, CEO of Australia-based investment firm Kalkine.
Qualcomm has expressed interest in the U.K. chip designer, though the company is also reportedly thinking about creating a consortium of chipmakers to buy Arm.
"Qualcomm is one of Arm's biggest licensees, and its acquisition makes sense for it," said Sawhney. "SoftBank would always prefer to keep a controlling stake after the IPO and therefore may go for a partial sell rather than divesting the entire stake."
Qualcomm did not respond to a request for comment.
In terms of valuation, SoftBank may face at least a 30% reduction compared with the $40 billion price tag NVIDIA offered, Dhiab said, citing the contraction in tech equity markets.
The tech-heavy Nasdaq and the S&P 500 indexes have respectively fallen 26% and 18% year-to-date, as of June 27.
Fall of the tech stocks
The slide in tech share prices helped drive some of the losses in Vision Fund 1, particularly in terms of e-commerce company Coupang Inc. and ride-hailing giant DiDi Global Inc., among others.
The portfolio's fiscal 2021 losses came after similar disappointments in 2020, when WeWork and Uber Technologies Inc. underperformed.
As for Vision Fund 2, the decline in share prices of KE Holdings Inc., a China-based holding company engaged in housing transactions, and a decrease in fair value of a number of portfolio companies led to an unrealized loss of ¥271.86 billion for fiscal 2021.
T-Mobile shares an easy option
Rather than waiting for an Arm IPO, SoftBank could also liquidate its remaining T-Mobile shares to raise capital for Vision Fund 2, analysts said.
"T-Mobile shares are the easiest and least complicated to sell when compared to its other holdings," Dhiab said.
In the past, SoftBank has shown that it is able to sell its T-Mobile shares to Deutsche Telekom AG in tranches easily due to the structure of their agreement.
In April, the German telecom company paid $2.4 billion to SoftBank Group to increase its stake in T-Mobile. This came after the Japanese conglomerate entered a partial sale swap of T-Mobile shares to Deutsche Telekom in September 2021, which involved selling 45 million T-Mobile shares to the European telco in exchange for 225 million Deutsche Telekom shares. Under the agreement, Deutsche Telekom gave SoftBank the flexibility to borrow against its T-Mobile stake via margin loans.
SoftBank Group has 39,771,809 T-Mobile shares as of April 2022. Closing at $136.54 on June 27, SoftBank's T-Mobile shares are currently worth about $5.43 billion.
Telco, Alibaba shares not good options
Before the telecom unit was spun off and publicly listed in 2018, SoftBank Group reported that its telecom business accounted for nearly a third of the conglomerate's operating income in the six months ended Sept. 30, 2018.
Also, selling more of SoftBank's telco shares could be seen as a bad signal to its investors, LightStream's Kato said.
"Selling SoftBank Corp. shares risks losing touch points with the public and retail investors as it is the most visible part of [SoftBank Group's] business with its branding," said Kato.
Meanwhile, Alibaba shares are trading at a heavy discount amid lockdowns and ongoing regulatory scrutiny of tech stocks in China, so "it will be bad timing to start unloading," said Dhiab.
Further, with no plans to revive the public listing of Alibaba's financial affiliate, Ant Group, the company's upside is capped, making it an even tougher sell, analysts said.
Investment approach change
Lastly, SoftBank could consider a "more conservative investment approach" toward Vision Fund 2, which includes fewer growth stocks and more smaller, diversified bets, Gil Luria, technology strategist at investment firm D.A. Davidson, said.
"I would expect VF2 to make a lot more investments in the million-to-tens-of-millions range rather than the hundreds-of-millions-to-billion range as low public market valuations are dragging late-stage growth valuations far more than earlier ones," said Luria.
Son has been a big believer in ensuring artificial intelligence should be at the heart of every investment he makes. From his portfolio of 252 investments in Vision Fund 2, 22% are in consumer technology, followed by 18% in financial technology and 16% in enterprise sectors.